Economic & Market Update: October 27, 2008

“Big Fundamental Week Ahead”

Chip Norton, Managing Director of Fixed Income & Economic Analysis

Last Week:

Dow :                                     8378, down 543 points for the week

S&P 500:                               876.77, down 88 points for the week

VIX:                                        79, up 16 for the week (hit 88 mid week)

10-Yr Bond:                         3.69%, down 27 bps during the week

3-mo TBill:                           0.88%

AAA 10-yr Municipal:       4.4%

Dollar/Euro:                        1.24, steady for the week

Dollar/Yen:                           93.25, down almost 7%

Oil:                                           $62, down $10

Economics This Week:

Date      Item                                                Comment

10/24    Existing Home Sale                     5.18 Mil – Better than expected

10/27    New Home Sales                         Expect 450k, another slowing

10/28    Consumer Confidence                 52- a low reading remains

10/29    FOMC                                             Expecting 50-75 bps cut

10/20    GDP Q3                                        Look for -0.5%, wide variation in estimates

GDP Ready to Disappoint

This week will see several very important economic releases including the FOMC meeting and the preliminary data for Q3 GDP.  While it’s hard not to be watching the equity markets hour to hour with such volatility and downside activity, the underlying economic fundamentals are what will shape the markets past this very emotional period.

Just two months ago, the Q3 and Q4 GDP estimates were clustered around 2.5 to 3%. The events of the last six weeks have, of course changed all of that. With the impact of job loss and financial sector stress, along with general economic slow down due to lack of credit and impaired consumer spending, the data now points much lower.  The general consensus is now a loss of 0.5% for Q3 and similar if not worse for Q4.  What will be tricky in the data will be the positives of economic growth that occurred in Q3 prior to the market meltdown. This could lead to a slightly better number near the 1% range, say some economists. Unfortunately, a good read will really be a head fake and revisions will most likely show weaker data. Indeed, the forecast for Q4 looks even bleaker, with numbers ranging from down 0.5 to as much as 2%.

FOMC Takes Action

The FOMC meeting this week is expected to produce a rate cut of 50 to 75 bps. Many suggest the Fed should do even more with a full 100 bps cut. However, the Fed has been so active in providing liquidity via joint central bank intervention and the various new programs, they may hold back on their most overt monetary gun to allow for some further rate cuts down the road. For example, if they do 100 bps this time around, they only have 100 bps left before the fed funds rate is 0%.  However, the Fed has been very creative through this crisis and may come up with some new twist of monetary shift. For example, they could actually take the Discount rate much lower, say to a discount of the fed funds rate.

Some Good News

It’s a hard task to find good news in all that has happened, but the fact that oil prices are now on the verge of breaking $60 and gas levels are as low as they have been in a year, this does help economic conditions -- especially in the manufacturing sectors. The national average price for a gallon of self-serve, regular unleaded gas was $2.7785 on October 24, a decline of about 53 cents per gallon in the past two weeks, according to the survey of some 7,000 gas stations. Gas is now about a penny cheaper than it was a year ago, and about $1.33 less than it was at a record peak in July. Back in the “old days,” you know, in 2007, a $10 drop in oil prices helped increase GDP by ½ percent. So, if that held true today, GDP should be helped by about 3% in the last six weeks. Ok- we know that won’t happen, but it significantly helps profitability in the non-service sectors and that’s important as we think about recovery.

The other big piece of news through all of this is that inflation has all but died.  The implied forward expectations for inflation (CPI Swap Curve) are now running just above 1%. This is down from almost 3.5% this past summer. The reasons are two fold. First, a slower economy traditionally translates to a reduction in buying demand which eases prices. Second, the collapse in oil prices and lower demand in energy from Asia lends itself to lower oil prices going forward.  Combined, these two factors have dramatically shifted inflation expectations, which helps consumers during a recessionary period. 

Finally, the housing markets are starting to show some stability. This is not widespread and many regions are still suffering, but a look at existing home sales show some decent leveling. It’s very hard to tell is this is indeed the bottom or just a plateau to a lower level if the economy accelerates into recession but, the data are the data. Below is the most recent read from the National Association of Realtors.  You can clearly see inventories topping and sales bottoming. Indeed, existing home sales rose 5.5% to 5.18 million in September, largely above market expectations. For the first time since November 2005, home sales increased on a y-o-y basis, mostly in the Western states. The increase in home sales has started to reduce buildup of homes inventory on the market for sale. Inventories of homes for sale fell 7% in August and held at this level in September.

Lighter Side: When October in the Stock Market Doesn’t Go Well !

About Fortigent:

Fortigent, LLC delivers a fully integrated and customizable business-to-business outsourced wealth management solution to banks, trust companies, and independent advisory firms. Services include an "open architecture" investment platform with particular expertise in alternative investments, a flexible unified managed account program, and consolidated wealth reporting. Fortigent's web-based portal interface allows access to proposal and rebalancing tools, client portfolio reporting and accounting, as well as industry articles, research papers, and other practice management and business development resources.

The information provided is general in nature and is not intended to be, and should not be construed as, investment, legal or tax advice. Fortigent makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based upon information that Fortigent considers reliable, is not guaranteed as to accuracy or completeness.

Not FDIC Insured No Bank Guarantee May Lose Value

(c) Fortigent, LLC

www.fortigent.com